Executive Rank, Pay, and Project Selection

This paper extends the literature on CEO compensation by developing and testing a principal-agent model of executive compensation in the context of project selection. The model's focus on executive project selection decisions highlights the multi-dimensional nature of executive choices that affect the value of the firm. An executive not only makes an effort choice that determines the quality of information on which to base a decision, but also sets the decision criteria for selecting projects. A project selection framework is also shown to introduce endogenous uncertainty into compensation that can influence the executive's effort choice. Using an extensive dataset, our empirical work supports the main hypotheses of the model, including the significance of executive rank in determining the extent of use of incentive pay in general, and equity-based incentive pay in particular